Don’t Want to Buy Distressed Assets? Then Try Insuring Them

Warren Buffett’s Berkshire Hathaway has started selling insurance coverage on foreclosed homes occupied by distressed borrowers with the goal of making money from banks hurt by the mortgage market collapse. These policies are riskier than usual home coverage because the properties may be neglected or vandalized.

“It’s part of the standard practice of Berkshire, which is to respond opportunistically,” said Tom Russo, a partner at Gardner Russo & Gardner, which owns shares in Berkshire. “They have the capital to act and the credibility.”

Buffett, whose Berkshire Hathaway has $24.5 billion in cash, cut back on coverage of large commercial properties against catastrophes like hurricanes when the recession started and demand fell. The home insurance venture positions Omaha-based Berkshire Hathaway to benefit from the supply of foreclosed properties that has grown fourfold in three years. Because Buffett came through the subprime crisis in good shape, he has been able to increase his holdings in companies hurt by the recession in markets where demand is growing.

Berkshire Hathaway’s expansion in the area of foreclosed and distressed property insurance is noteworthy. What’s key is that they have been able to come up with some level of asset valuation (i.e., home price or home replacement cost) in order to be comfortable pricing such insurance. This is a good signal which would indicate that, at minimum, smart money is comfortable with home valuations at some level, and is willing to underwrite to those values.

S. Jafer Hasnain is a Managing Partner of Lifeline Assets, a Chicago-based real-estate private equity firm which he co-founded in 2008. Mr. Hasnain was previously a portfolio manager and analyst at AllianceBernstein for 14 years with stints at Merrill Lynch, Citibank and Goldman Sachs prior to that.